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Be careful when paying bonuses to children

It may seem very risky to have a child working in your office if you are a small business owner, but there are some definite financial benefits that can be realized.  This is because children who work part time in a parent’s business may not need to complete a tax return if their earnings are less than what the standard deduction for a single filer would be. Further, kids who work in businesses that are unincorporated may not owe any taxes.

Indeed, the notion of kids providing important labor may be good when it comes to taxes, but business owners should take the old adage “pigs get fat and hogs get slaughtered” to heart. In fact, the story of the McMinn family should be a story of caution for business owners. 

According to a Forbes.com report, the McMinns owned several businesses. They included a cattle leasing business that was languishing in debt; a multilevel marketing juice business, as well as an embroidery machine business that was turning quite the profit. A persistent and motivated IRS agent pursued them incessantly and ultimately found that bonuses that were paid to the children were not properly classified, and that led to severe tax penalties.

Basically, a tax court found that the end-of-year bonuses did not reflect the value of the work provided, and that these payments would not have been made to similar employees who were not related to the McMinns.

Ultimately, children who work within the family business cannot be paid large bonuses in order to avoid the payment of business taxes.   

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Law Offices of Charles R. Frazier
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